Russians live the caviar dream

Karl Marx would have had a heart attack, and Vladimir Lenin must have been spinning in his tomb.

Last weekend, some 45,000 people here crowded a giant exhibition hall 40 miles northwest of Red Square to ogle and buy jewelry, art, yachts, private helicopters, jets and a Tuscan villa at what is billed as the world's leading luxury display.

The "Millionaire Fair," as the exhibition was called, was no cruel joke on a deprived proletariat. There to buy, says Yves Gijrath, a Dutch businessman who brought the fair here starting three years ago, were oligarchs, the country's nouveau riche elite, an upcoming middle class and "those who are fascinated by luxury items."

Less than 20 years after the demise of communism and less than 10 after economic collapse, Russia's economy is on the rise, fueled by ever-higher prices for its government-controlled oil and gas exports and an insatiable demand for consumer goods.

Economic growth is averaging 6.7% since the 1998 financial crisis and was 7.4% in the first nine months of this year, according to the Ministry of Economic Development. Incomes have risen more than 12% the last five years, according to the Federal State Statistics Service, with a middle class that had grown to 55 million last year from 8 million in 2000 in a nation with 141 million people.

Signs of rising prosperity:

•Real estate is soaring. Home prices have climbed for five consecutive years, and a mortgage industry that began in 2002 is issuing $20 billion in home loans this year, according to Ruslan Iseev, first deputy chairman of CityMortgage Bank of Moscow, a Morgan Stanley company. He predicts it could hit $100 billion in five years.

•More Russians have cars. There are 36 million registered vehicles in Russia now compared with 11 million in 1995 and 28 million two years ago, according to Russia's Interior Ministry.

•And more are taking foreign vacations. Last year, 7.7 million Russians traveled outside the old Soviet bloc compared with 2.6 million in 1995, according to the Federal Tourism Agency, with foreign vacations increasing 31% in the first six months of this year.

Good economic times are why many Russians say they support President Vladimir Putin in his bid to remain in charge of the country by running for parliament at the top of the ticket of United Russia, the main pro-Kremlin party.

He is barred by the constitution from a third-consecutive term as president.

"I like what Putin does," says Valentina Slepuk, 57, a retired nurse in Moscow. "I would like him to stay on (as president). He has brought reform and stability."

Although she lives on a pension, Slepuk says she works a little on the side and can afford the ballet and opera two or three times a year. If she saves, she says, she can travel to see family in Belarus every year or two.

"I'm not bad off," she says. "The economy is more stable than 10 years ago when we were not able to buy anything. It was terrible."

Designer shops abound

Nowhere is Russia's growing prosperity and quest for consumption more conspicuous than in Moscow.

Less than 100 yards from Lenin's tomb and within eyesight from Putin's office inside Kremlin walls, the famed GUM department store that was stocked with pots, pans and scarves 20 years ago is now home to Christian Dior, Louis Vuitton and Hermès designer shops.

Down nearby streets lined with parked Mercedes dai, Lexus and BMW vehicles, shoppers can find Tiffany & Co. tif, Chloe, Gucci, Ralph Lauren rl and Bulgari stores along Moscow's chic Tretyakovsky Street. A few blocks from there is Stoleshnikov Lane, where there is another Dior store, along with Van Cleef & Arpels and Cartier.

Plenty of people here can afford these stores. Moscow is home to 44 billionaires, second in the world only to New York's 66, according to the Forbes 400 list. Most of Russia's 119,000 millionaires, as estimated last year by Merrill Lynch mer and the consultant group Capgemini, live in the greater Moscow area.

The city is now the most expensive in the world, according to this year's Mercer Human Resource Consulting survey of expatriate living costs. There's a Ritz-Carlton near Red Square and a five-star Marriott mar and Sheraton not far away.

Many more four-star hotels cater to business travelers, who are bringing what Finance Minister Alexei Kudrin last week estimated would be $70 billion in foreign investment this year on top of last year's $41 billion. Rooms in a four-star hotel cost about $500 a night. It's easy to pay $50 or more for a two-course meal and a glass of wine in a restaurant that caters to foreigners. A beer costs $8 in a hotel.

"It's very expensive," says Evgeny Gavrilenkov, chief economist for Troika Dialog, Russia's oldest private investment firm. "It's not just hotels and food. In the central part of Moscow, real estate prices are as high as Paris."

Modern two-bedroom apartments in the city's center are advertised for $3,500 to $10,000 a month. A six-room "cottage," as Russians call suburban houses, can run up to $65,000 a month in the prestigious Rublyovo area about 12 miles west of Moscow, which is home to many Moscow millionaires and the rising business and entrepreneurial class.

Anna Muravina is an interior designer and entrepreneurial success story. She caters to Russia's wealthy. Her MuGu Interiors firm, which she started in her apartment 12 years ago with a friend, now employs 15 to 20 people on average and keeps about seven projects going at a time. She is rated a top Russian designer by the likes of Architectural Digest and Andrew Martin International.

Russia's rich are different, Muravina says. Many older ones, who came out of the old Soviet elite, "had terrible tastes. They came from small villages and hadn't traveled," she says.

That's changed as more have traveled, their offspring have risen in such state-run industries as gas and oil, and a younger entrepreneurial class has emerged in the free-market sector, she says.

Nonetheless, she says, she still gets odd requests. Some clients will see things in foreign hotels, such as minibars in their rooms, and want one in their bedroom. Or, she says, they'll want two kitchens: one for their cooking or catering staff to work in when they entertain, and another for the family to sit around in, just as they did in their old apartments.

"It's a little strange, but it's Russian," she says.

Not everyone in Moscow is rich, although the average annual income of $23,000 here is double the national per-capita income. Moscow's 15 million people also produce roughly 28% of the nation's economic output, Troika's Gavrilenkov says.

Economic inequality

There are homeless people, like Igor Vladimirov, 47. He begs outside the Belorussky train station, despite the city's effort to keep a cosmopolitan image by sweeping people like him from Moscow's center.

Vladimirov says he has been living on the streets since his mother died two years ago and his sister sold his mother's apartment, where he had been living. Seventy percent of housing here was acquired in 1992, when people were given the homes they were living in. But rising prices make housing scarce because construction isn't keeping up with demand.

There are no official numbers on how many homeless there are. But Putin last year said too many Russians still live in poverty, about 17% of the population, down from 30% in 1999. They live on $88 a month or less, compared with the average monthly wage of $540.

For them or the thrifty, there's another Moscow away from the hotels and designer stores. There, beer at a bar is $2 a glass, vodka can be bought in a store for $8, and a three-course "businessman's lunch" is $7.

But more typical of the rising middle class is Oxana Yakovleva, 28, who works in a Moscow bank. She and her husband, Vitaly, and two children view themselves as an average, young Muscovite family.

"In Moscow you can afford things," she says. "Prices and costs are high, but the salaries here are quite high. Most of my friends also can afford many things."

They live in a studio apartment, with a small bath and kitchen, that they bought three years ago for $65,000 in a 20-year-old building, and pay $1,000 a month in mortgage payments. She drives a Subaru Forester, for which they got a no-interest loan.

They have vacationed on Turkish beaches and in Germany the last few years. They won't this year because Vitaly, 28, also a banker, is studying business in Italy and family finances are tighter. Any foreign travel will be to Italy.

Yakovleva says she is optimistic their lives will get better — if the economy as Putin has managed it continues to improve. If it does, she says, they hope for a bigger apartment, a dacha (country house) and possibly education abroad for their children. "And I'll probably be visiting all those designer shops," she says.

Economic pressures building

Just as Putin has given many Russians a sense of economic stability and optimism, Gavrilenkov of Troika Dialog says his continued hold on power presents foreign investors with a sense of economic predictability that they seek.

He questions, however, whether Russia's economy can continue at this clip, even with oil staying higher than $90 a barrel, and filling state coffers to invest in housing, infrastructure and the military.

Russians' demand for consumer goods is outstripping the nation's ability to produce them, he says.

"The growth is too rapid," he says. "So you have to go abroad for imported goods. If the (trade) surplus shrinks … the economy will stumble and contract."

At the same time, he says, the Russian government's bureaucracy is growing by 10% a year. Inflation hovers at about 10%. In response to pressure on consumers, Putin ordered a pre-election price freeze on food staples and gasoline and tariffs on grain exports.

Gavrilenkov says the economy may not stumble in the next year or two, but it is likely to in the next five to seven years.

To hedge their bets, some wealthy Russians have moved some assets and their families abroad. Many professionals also are emigrating. London has become a magnet. It is home to about 250,000 Russians, British Foreign Secretary David Miliband said earlier this year. As of last year, Russian firms and individuals had deposited at least $100 billion in British banks, the Bank of England said.

"Some might be hedging," says Natalia Leshchenko, a Russia analyst at consulting firm Global Insight in London. "But it's not just the well-off who are coming. Professionals come to work."

Muravina, the Moscow designer, just opened a shop in London to help moneyed Russians decorate the homes they are buying in upscale Belgravia, Knightsbridge and Chelsea neighborhoods.

London's famed Harrods department store also is trying to appeal to rich Russian expatriates in their windows this Christmas season by offering luxury jewelry, clothing and furniture under the theme: A Russian Winter's Tale.

But what Harrods is showing is small potatoes compared with what at least one Russian bought at the Millionaire Fair back home last weekend: an eight-passenger Bombardier Learjet, that Alex Todd, president of European markets for the U.S.-based Luxury Air Jets, said he sold to a client he wouldn't identify for $10 million to $20 million.